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Westpoint Company made two announcements concerning its common stock today. First, the company announced that its...

Westpoint Company made two announcements concerning its common stock today. First, the company announced that its next annual dividend has been set at $1.45 a share. Secondly, the company announced that all future dividends will increase by 5.5% annually. What is the maximum amount you should pay to purchase a share of Westpoint's stock if your goal is to earn a 15% rate of return?

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Answer #1

Ans $ 15.26

P0 = Price of Share
D1 = Dividend
Ke = Cost of Equity
g = growth rate
P0 = D1 / (Ke - g)
P0 = 1.45 / (15%-5.5%)
P0 = $ 15.26
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